What Next For Greece And For Europe?

Uncertainty about potential loan losses in Europe continues to roil markets around the world. For many investors, taxpayers, and ordinary citizens there is no clarity on the exact current situation – let alone a stable view about what could happen next. What should any friends of Europe — the US, G20, IMF, perhaps even China — strongly suggest that they do?

A good start would involve being honest on four points. There is nothing pleasant about the truth in such crisis situations, but continued denial increasingly becomes dangerous to all involved.

Greece is on the front burner. Currently on offer is a debt swap for private sector lenders that, once it goes through, will effectively guarantee 33 cents for every 1 euro in bonds that they currently hold. The downside protection here is attractive to banks – made possible by the fact they will now get hard collateral in the restructured deal (meaning that Greece buys the bonds of safe EU countries, like Germany, and holds these where creditors could get at them).

The first brutal truth is that this is a default by Greece and all attempts to deny this or use another word just muddy the waters.

Greece can probably afford to service debt restructured to this level – although that will depend also on the final terms of EU and IMF funding. But the second truth is that this is a wasted opportunity for Greece. It does not put their debt problems behind them and, most likely, they will be back to ask for further reductions in principal in the future.

The ice has been broken: The EU has agreed that a euro area member can default. Greece should now go all the way – aiming to end up with new bonds that have a 3 year grace period on interest and 10 year grace period on principal.

The third truth – and most difficult for many to stomach – is that, in the context of any such deeper debt restructuring, the Greeks should cut public sector wages across the board and bring down other spending to make their budget deficit much smaller immediately. They and the IMF need to assume another recession in 2012 and no growth for five years. They should aim to balance the primary budget on a cash basis in 2012 (since there would be no interest due, this would also mean they need no cash from any kind of lender). In this scenario, they could collateralize the new bonds with state property.

There is nothing particularly fair or at all just about this set of outcomes. Everyone in Greece is hurt now by the consequences of excessive spending, big deficits, and reckless lending (to the government) in the past.

The issue is: What are the alternatives? If it adopts some version of this deeper debt restructuring approach, Greece can stay in the euro zone and find its way back to growth (assuming the world economy does not go down again sharply). Its private sector will eventually rebound.

In contrast, if Greece were to leave the euro zone, its financial system would cease to operate – at present Greek banks depend to a great extent on support from the European Central Bank (for more background and the available numbers, see our recent Peterson Institute policy brief, Europe on the Brink; http://www.iie.com/publications/pb/pb11-13.pdf). Do not try to run any modern economy on a purely cash basis; the further fall in GDP would be enormous.

And if Greece pays its debts at the currently proposed level (33 cents in the euro), it will struggle to grow. The tax revenue needed to service that debt would burden businesses and households for decades – enterprising and productive people will move their fortunes and their futures elsewhere in the euro area or to the United States.

The fourth and most dangerous truth is that Italy and Germany are not ready for the next stage of the euro crisis.

Any further adverse developments in Greece will precipitate a run on Italy – involving investors selling Italian government debt. The European Central Bank is currently prepared to buy Italian bonds, to keep down interest rates below 6 percent.

The Germans are obviously very worried by this approach – hence the resignation last week of Jurgen Stark, who was the senior German representative in ECB management. He has been replaced by someone who is likely to take an even tougher line on bond buying.

Aside from the politics, the risk is that the euro loses credibility and falls steeply in value. The ECB thinks it can “sterilize” any bond buying by also selling its own bonds into the market – this would mean no net increase in the supply of money (just fewer Italian bonds and more ECB bonds being held by the private sector).

As a technical matter and in the short-term, the ECB may be right. But the ECB is taking on a lot of credit risk – if a big country defaults, the ECB would need to ask member governments to provide it with more capital and this is the kind of transparent fiscal hit that politicians hate.

And if ECB funding seems really unconditional, this just encourages countries not to be careful about their fiscal deficits. “Fiscal dominance” – meaning a central bank always buys up government bonds to keep interest rates down – is a recipe for big inflation.

Expect a great deal of shouting behind the scenes at the highest level in Frankfurt (ECB headquarters) and in European capitals. Instability seems unavoidable. Significant inflation may also follow – although first we will see serious recessions in the troubled European periphery, a ratcheting up of bond buying, and repeated political crises.

41 responses to “What Next For Greece And For Europe?”

What’s next for the Native Indians and the Republican Ruling money at home? Our Financials had a great deal to do with Greece, Iceland and the rest and it seems they are targeting Chile again as we speak.

Meanwhile James speaks to “disclosure” on the Corporate investment money into attributions and direct political persuasions while the “shadow” currnecies of people like the Koch Bros empire building is working on our domestic economy. All of which is compliments of the tax free right wing think tank system and so-called “foundation” fronts of people who have scavenged the economy and sucked up the money supply. Now we have political contests that are (on scale) on par with the Taliban!!!!

American Home grown Taliban arrive: the advent of Rigtheous right wing Republican Terrorism has arrived.
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Jacobs: ‘The Response’ Broke The Curse Of Native American Cannibals
Submitted by Brian Tashman on September 12, 2011 – 5:01pm

“Jacobs claims that lands are cursed with violence because they were previously inhabited by Native Americans who “did blood sacrifice” and “were cannibals and they ate people.”
Fortunately, Jacobs maintains, Texas Gov. Rick Perry’s The Response prayer rally in Houston broke the curse and “the land is starting to rejoice, you see, because of that prayer.”
This concept of curses left by Native Americans has a large foothold in the New Apostolic Reformation, and today Bruce Wilson reported that NAR figures Chuck Pierce, John Benefiel, Tom Schlueter and Jay Swallow recently participated in an event in Teas that involved “smashing of Native American art objects” in order to “divorce and tear down the principalities of Baal, Asherah and Leviathan.” Like Benefiel and Swallow, Jacobs was an official endorser of The Response.”
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The destruction of Native art and artifacts is virtually identical to the Taliban rule. It is a hate crime in this country and should be prosecuted…we, as anthropologists, must get the word out that this is absolutely despicable and intolerable in America. The American public across the nation should be outraged and demand criminal actions for this hate crime and deliberate destruction of Native artifacts.

The only true insight that I can safely say is absolutely true in your update on the forefront of crisis is

From what I understand, the Germans will first recapitalize their banking system before contributing anything to Greece. And secondly, we just ran efficiency and productivity out of town and forced it to try to make a home in Greece knowing the tax burden could crush its opportuntiy and be left for dead. I think a complete collapse is in order so that some of us CAN get on with what is right in this town. Continuing the same old same old will do just that, create a worse hyperinflation and even a deflationary spiral that will lead to price inflation and riots in the streets in a couple short years. We are seeing a second wave of meat and chicken slaughter which once consumed at a good cost, will sky rocket with little notice and be felt in the stomach in the form of hunger pains. Thats when its time to move to the country.

“the Greeks should cut public sector wages across the board”. Really? I thought the Greeks should first fix their problem of how they actually collect taxes in that country. Way too many people simple avoid paying taxes to begin with. A better tax collection system is far better than lowering public sector wages.

@Woych – well okay then, can’t turn Perry into that TV character of Cheyenne Brody, and then count up how many jobs Mitt eliminated over his political career (his plan for being one of the 144,000 to make it to the Mansion Worlds) and we’re done – lunatics the whole bunch – too much sun in the west…?!

Should we send over the best minds on the planet?

(that BP PR transmission during its crisis was GENIUS, no? – “we have the BEST MINDS ON THE PLANET working on the problem…”)

The professionals on “Antiques Roadshow” to tally up how much Greece is worth….?

Craven avarice about owning Native American land – that’s what the Wild West is all about….no comment on how rapidly it’s trashed once they *own* it….talk about soaking land in blood…that’s how freekin’ INSANE they are – they cursed their own land with murder in order to steal it…and not just from Natives anymore – hello mortgage SCAM…god you guys do live in DaNile a lot…

You take a haircut, sorry, we are all big boys and girls. If I plow $$$ into my 13 year old Buick, I’m betting the clunker will continue to perform. If the clunker breaks down, and more repairs are needed, perhaps I bet wrong….but I knew well in advance the bet could go south.

Forget AUSTERITY, it doesn’t work, period. Austerity prolongs this world wide depression, and fosters social unrest.

The system is BANKRUPT, Simon and Peter, and the sooner the toxic poo is allowed to purge out, the better the results will be.

Penalizing PEOPLE so bankers can keep THEIR CLUNKER on the road, is morally wrong, and leads only to war.

I don’t feel sorry for the Greek’s one iota! They went way beyond their means, abusing the generosity of the European Community in which they had/held a fiduciary responsibility to adhere too. Simply said,… I believe there was malfeasance, and criminal confluence on a international scale orchestrating this quasi-ponzi-scheme!
Let’s focus on the American’s, and the people in there late forties, early fifties getting pension checks in the high five-digit ($$) / six-digits ($$$) – forever, and growing. As a matter of fact,… I know some that get a double package set up by the States, and Municipalities where they work one at 20yrs, and jump to another at a pre-determined10yrs and receive well into the hundred’s of thousands ($$$$) – Forever! This ain’t sustainable folks, and its in all our little quiet home town communities, and runs rampant in the bureaucratic big cities!
It’s always the common citizen that suffers the most, and this time as usual, nothing will change that outcome, sadly. Why does it always come down to the Greek’s and Roman’s anyway?
The Greek’s should bail out as fast as their leaders flee the country to America for asylum? There is absolutely no hope for the country, period! I will reference the country of “Haiti” as a perfect example to juxtapose “What’s Next for Greece’s” fortune,… now, and well into the future? Answer: “Ultra, Ultra, Maximus Usury”!
The Chinese could come to the rescue years out, but for now the Greek’s will turn once again to communism as a last resort? JMHO

excuse my ignorance – if it makes losses, why would the ECB have to be recapitalised by governments? You use the word “fiscal” which I take to mean out of tax revenues. Why can’t the ECB just print money? (or, alternatively, why does it matter if a central bank’s assets don’t cover its liabilities?)

“Uncertainty about potential loan losses in Europe continues to roil markets around the world.” really means “Certainty about loan losses in Europe continues to roil markets around the world.”

When participants know the rules of the game and continuously cheat without fear of real punishment, because the officials are sissies, the game will disintegrate. And in the end every participant looses.

A helpful article on a difficult and fluid situation. However, Please clarify the following: “Greece is on the front burner. Currently on offer is a debt swap for private sector lenders that, once it goes through, will effectively guarantee 33 cents for every 1 euro in bonds that they currently hold.” –Precisely who is offering this, contingent upon what actions by whom, i.e., what are the specifics of, “once it goes through”?

Ref: http://www.zerohedge.com/news/eurusd-opens-100-pips-lower-round-greek-default-fears
Tyler Turben (TD) ___ 9/18/11___ 16:16 (fwiw/ imo)
Scroll ~ 11th comment down to commentor___ “mkantern” (This rationale/ thinking out-loud, has been circulating about for sometime now, and it seems timely and fast track [ready-aim-fire] status implementation, with a few hurdles to be crossed? But what the hell,… alittle half-ass, is better than the original monkey’s ass?
Quote:
“I have said this before and I reiterate my thesis that either the weaklings are going to be shot out of the Euro in a massively costly Lehman-like event, or, as modern economic theory and what not, they could come closer together fiscally, and physically with the “European Financial Stability Facility (EFSF)” taking the role of an “European Monetary (Cooperation) Fund (System) *{EMF}*” – ,… ( Int’l Monetary Fund [IMF] like institute for Eurozone), in effect creating a European Treasury to issue, Euro Bonds, and thus instituting a blue-bond, red-bond plan, where x% of a country’s financing is European and y% is domestic, thus limiting debt by market rates. But at the same time providing a backstop of European credit quality for majority of debt, implying the x% would be greater than 50%, probably somewhere near 65-70%.”

PS. There is/ was as you know talk of a bifurcated Euro (Gold/ Bronze), or simply a two-tier monetary system that would not work because of the Maastricht Treaty – the “Riga Graduate School of Law (RGSL)” [ [pdf] explains somewhat in layman terms.

“He (Stark at ECB) has been replaced by someone who is likely to take an even tougher line on bond buying.”

Joerg Asmussen is moretougher than Stark???? You have made a fundamental and grave mistake.

I would also like to remind you that Axel Webber (former president of the Bundesbank and ECBmember) has done a180 degree turn on Greece… Just to clarify Webber went from being very tough to very supporting.. of Greece. Obviously fine economists like him have understood the realities on the ground unlike you.

Every single time Germany has implemented nationalistic policies, it was a disaster for Europe – extremism, blood, and boiled grass was what the Germans were eating. Germany has got a lot out of this crisis: a weak euro for its exports, low interest rates for its growing debt. I will not remind you who paid for the German Unification. So please at least be honest in your intentions when you are “respectfully” strong with the weak.

Maybe the problem is that we have all forgoten how to stand up for each other in difficult times, may I kindly ask you to understand why the victor of WWII gave Germany something called the Marshall plan.

@vivek Jacob
“remind me again what is the US deficit on GDP going to be? And what is Greece’s?”

You may be thinking of Greek debt per capita, ($47,636) instead of debt as % of GDP, the IMF says it’s 130.2%. The US debt per capita is virtually the same as Greece $47,568 but it’s debt debt as % of GDP, though not great, is noticeably better; according the IMF, 92.7%.

Obviously one big advantage for the US, at least for the moment, is that the US continues to hold the world’s reserve currency and additionally, because it’s debt is in dollars, the US can always print its way out of its debt.

I’m not talking about debt, I talking about deficits. The meaning of ‘deficit’ differs from that of ‘debt’, which is an accumulation of yearly deficits. Deficits occur when the government’s spending exceeds the revenue that it generates.

2010 Deficit:
US = 10.6%
Greece = 9.6%

2011 Deficit (IMF Projection):
US = 10.8%
Greece = 7.4%

This bring’s US total financing need on total GDP for 2011 at 28.8%, Greece’s at 24.0%, Japan’s is 55.8%(source IMF – not economic geniuses, but they know their numbers).

I think the author’s have done a very sloppy, and biased work. It is this kind of “screaming from the bleechers” writting which is hitting the small investors.

There is a growing consensus in the UK to “Ringfence” (Glass-Steagall Act) their financial system, but what is of particular interest is the timely UBS debacle ($2.3bn [US$] and still counting-up^) in the Eurozone. As I write, there is strong talk of actually implementing a European style “Glass-Steagall Act”! Can you imagine the stability of the European Union if this simple/ pragmatic (~87pgs.) law was in place – Ireland, Greece, Finland, Portugal, Italy, and Spain and others would have fewer grey hairs, or still have those grey hairs,…it’s time for my European extended family to teach America a lesson that change is never to late too make the future brighter!
PS. Please send Tiny Tim packing, and put a muzzle on Ben’s holster blanks,… somebody please!

Note: Above link to, “Riga Graduate School of Law” looks as if must be Googled @ “Joining the European Union – Olga Bondare 2010/11)

What is coming next for Greece and Europe is obviously going to be worse than the Lehman crisis. It amazes me to see so-called serious people believing that this is all going to be neatly managed. It’s a ticking time bomb that can’t be defused, obviously.

thanx for taking us through some of the hard facts here: the US is on a rampage tour, deep hole economics as Krugman labeled it some time ago. the US doesn’t like taxes, dóesn’t like to pay their imports, what the US reallly likes is a quick buck, hence Wall Street and the humongous OTC derivativesmarket., somewhere dr. Marc Faber tells us that central banks en Wall Street are superb inventions, for they succeed to fool all the people all the time.

Greece is not a problem, the problem is what lies beneath: China getting fed (Fed) up with the way the US mishandles ther economy, their deficits and their debt, the Euro getting stronger and stronger, the OPEC threatening with the other currency (the Euro) in witch all the barrels of oil should be paid…Euroka, suddenly the Euro is in all kinds of deep shit…(with a liitle help of the ratingagencies, all of Wall Street and more than a few hedgefunds, to name but a few)

setting up the Big Short 2.0 (20, 200, who knows)

NIMBY all the way, beggar thy neighbor on the other side of the Atlantic.

I am not surprised at the comments made by Simon Johnson (From March 2007 through the end of August 2008, he was Chief Economist of the International Monetary Fund) who is biased in favor of the IMF, the rapist of nations with a Neoliberal agenta. He calls IMF a friend of europe? IMF current policies are made solely for the benefit of Wall Street, and the International bankers. As far as the Euro is concerned, It was created to enslave the masses and take away any remaining monetary independence countries like Greece had before joining the Euro. Greece was in much better financial situation before joining the Euro. Now It is under bondage, with a corrupt governrment and a currency that is controlled by a PRIVATE BANKING CARTEL.

The shorts on the Euro were 54,459 in the week ended Sept. 13, the largest so-called net short position since July 2010 data, and down from net longs of 2,539 on Aug. 23 (statistics from the US Commodity Futures Trading Commission).

On top of this you have to add that:

1. Nomura Holdings Inc. cut its year-end prediction to $1.30 from $1.40 citing increasing stress in Europe’s fixed-income markets.
2. The Vampire Squid on Humanity’s Face Inc. (opps I’m sorry Goldman Sachs – they triggered the situation with an act of pure speculation in funding Greece with off-balance sheet derivatives) lowered its year-end forecast for the euro against the dollar to $1.40 on Sept. 14 from $1.45.
3. Morgan Stanley sees the common currency drop to $1.25 by the end of March.

This confirms your theory of Wall Street and the OTC. But….

The last time this happened was around May 2010 Euro was in the range of 1.300-1.2700 and htey were all betting that the EUro would fall to 1.000. Guess what? The super-bonused geniuses (of Wall Street) got creamed! The Euro one year latter was at 1.4800! It is shameful that they are back with the exact same story! Will they ever learn? Here is what I said then and I reiterate today:

But what makes me laugh, and should have Wall Street worried about their paycheck, is that they consider the Euro economy which has 80% of debt vs. GDP, with the US Economy that has a debt level of nearly 93% on GDP. The U.S. debt will top $13.6 trillion this year and climb to an estimated $19.6 trillion by 2015).

THIS IN A CONTEXT WHERE THE PRINCIPAL OWNERS OF US DEBT ARE EUROPEANS!

Now think about this: US international reserves are hardly 142 billion dollars, compared to the 853billion dollar reserves of the EU. As you can see, there are some very strong numbers that point that what the markets are doing and the agencies rating are not rational. It is a highly speculative situation, because all of this is occuring in a low volume market. I guess that’s why the Fed is implementing aggressive US dollar swaps versus the Euro, to give liquidity to a market which has been clearly been lacking in volumes. Where Wall Street has always gotten it wrong (junk bonds, internet stocks, cdos, and the list goes one).

This doesn’t mean that there are not major issues that need to be resolved, but the Euro and the EU with their reserves, gdps, and current deficit levels will resolve all of the issues.

Can you imagine what Greece is going to look like after it cuts 20% of the size of its government? It sure ain’t going to look like the Obama administration, I can tell you that much.

Go and listen to UKIP Leader Nigel Farage who sums it up pretty well in regard to Greece and the corrupt EU:
“”It’s a plane landing at Athens airport out of which get an official from the Commission, an official from the ECB and an official from the appalling IMF. And those three people – the Troika you call them – go in, they meet the Greek Government and they tell the Greek Government what they may of may not do. You have killed democracy in Greece. You have three part-time overseas dictators that now tell the Greek people what they can and can’t do.”

“I have one last plea Mr Barroso,” Mr Farage said in conclusion. “Will you please help Greece. Help her to get her currency back, help her to reschedule her debts, help her to get out of the mess you have put her into. Your policies have failed. Stand up, be a man, admit it.”

I make a plea to Evelyn Rothschild and family, please help Greece with the trillions of dollars you have amassed over the centuries…..Zeus and the Other Gods will look favorably upon your great good works.

And once the *Grecians* are squared away (thanks, W), please look favorably at the other bankrupt countries in the EU.

Last, but not least, please donate to the USA, and forgive all its’ debt, that your central bank created with the debt-based money supply, something for everyone, as a kind of pay back to humanity.

The best solution to support Greece debts is to directly funding facilities from ECB or EFSF to buy back their own debts at the current market. Now market has already expected Greece default and the Greece bond prices dropped to 20-35% of notional value. If Greece can get direct funding from ECB from issuing the new bonds with lower funding costs to refinance all debts in the markets. Greece fiscal status is improving immediately. We could see Greece debt/GDP will drop to less than 70% and surely Greece budget deficit will start to surplus. This mechanism can be used for other PIGS and other European banks to reduce financial burdens. Surely market has been efficient to price in the Greece debt default risk and the market already restructure Greece debts and European policies makers should use orderly restructuring to solve Greece debts by market. For other PIGS, they can get lower financial burden from these processes.
However, Greece debt restructuring by market can solve the short term problem on European common currencies; however, the competitiveness would be the long term challenge of EU nations to solve the difference of competitiveness.
Actually, the financial imbalance is not EU issues but also global issues because the emerging countries with lower wages can gain high current account surplus to developed countries like US, although the trend is decreasing since crisis in 2008. The emerging markets policy makers should start to use more fiscal spending and policies support the stronger domestic economic growths again to reduce the imbalance. The emerging market central banks should relax the currencies intervention and the capital control policies in the past to promote the ongoing adjustments of currencies misalignments. The stronger emerging domestic demands will be only solution to drive global growth with sustainable path. The developed markets just use the policies to contain the growths to suitable paths with better shape of public and private financial status.
Therefore, global economic cooperation is important to bring global growth back to reasonable path. The developed market should use all policies to reduce financial risks from monetary policy to support liquidity and reduce financial burden of governments like Greece or banks. The developing market should start to use aggressive policies to drive global growths again to reduce financial imbalance and can alleviate the debts problems in developed markets from better economic growth from external demands.

How help Greece? I chanced on the following piece of accounting wizardry from 6 years ago – the road to crisis. Verbatim from BBC Radio 4’s main 3-hour news program, September 29th 2005 as Rebecca ? interviews that day’s guest marketeer, possibly Ed Warner:

Things are looking good though in Greece, Greek National Output up by 25%. The figures include some aspects of economic activity that weren’t being measured before.
Well, you’re leaving it to me to say this but er these ..
That’s what you’re here for ..
I’m here for .. prostitution apparently has been underestimated by the statisticians in Greece along with all manner of other parts of the black economy, money laundering and the like, and the Greeks have claimed that National Output is 25% greater than the official statistics had previously been suggesting. It’s very helpful for them because they had their budget deficit which they’d been measuring very accurately, but if they’d been underestimating the size of the economy then clearly the ratio between the two isn’t as bad as had been feared, it will make it easier for them to be a fully fledged part of Europe because the ration will come within the EU’s targets.

Not sure if it’s not too late but there may be worse things to do while the ship goes down.